The Dollar’s Lost Mojo: Will It Return?

The USD’s mojo hangs by a thread. The Trump administration may be partially to blame.

The course of the Dollar has changed drastically in the recent few weeks, registering the worst performance ever since 2008. In early February, the buck registered deep losses against a slew of other currencies, some analysis pointing to Trump’s administration and policies. Actually, what followed was a sharp rise in the EUR/USD rates. The slump in the Dollar’s performace has been a rather contrasting occurrence, given the Trump administration’s efforts to boost the US currency through its investment proposals and pledges to cut back taxes and regulation.

The reasons for the underperformance, despite such strong evocative policies, may be the counterintuitive actions taken by the administration. Stocks in the U.S remain under pressure following the firing of US Attorney General Sally Yates. Yate’s let-go comes forth after he publicly questioned whether Trump’s refugee and immigration ban was constitutionally applicable.

Nevertheless, the uncertainty cropping the global markets might deter investors from placing huge bets on the US dollar. Trump’s modus operandi lies in making bold claims and public threats prior to negotiating them. Such a strategy elevated volatility as investors interpret messages and tweets from the White house before drawing investment conclusions.

An analysis by Bloomberg, involving a measure of the US dollar’s strength against other currencies, outlined that the currency was on a course chalking up at least 2 percent decline for January-2017 – which was its worst performance since January-2006’s 2.4 percent decline. Currency traders lowered expectations for the USD following Mr Trump’s expression concerning the currency strength in which he described the currency as too strong against other currencies.

Mid-March saw an interest rate hike by the Fed, for the first time in 2017, sparking arguments that such interest rates would undermine the US Dollar’s strength in both medium- and long-term. Well, the evidence is not exactly spell-binding; it was relatively predictable.

The U.S economy’s ill health has had many predicting the Dollar’s inability to rally. This has seen the failure of the dollar to drive GBP/USD and EUR/USD lower while maintaining enough strength to limit upside. A weaker Dollar, further abated by previous overbuying and the Fed’s belligerence, may some predictions for near future. A weaker USD would mean expensive imports into the U.S, and thence encourage domestic consumption. Theoretically, this phenomenon would narrow down the trade deficit since the U.S exports will be cheaper on the outside market. On the other hand, a stronger USD will imply more expensive goods and services to other users trading in other monetary units. A dollar pullback will denote a boost to shares of the U.S multinationals such as Apple.

But all is not dark, yet. Two factors may be imperatively responsible for bullish sentiments on the USD. First, the increase in fiscal spending as advocated by Trump that could make the Fed tighten monetary policy – further supporting the USD. Second, the fund inflows into the U.S (~$1.2 trillion overseas), including Trump’s proposal to cut on corporate tax may reinforce the dollar. The hard-charging trade agenda and efforts to talk down the USD by Trump’s administration are incompatible. The proposal to implement a border-tax regime or tariffs in an attempt to favour U.S manufacturers would significantly boost the value of the dollar.

The GBP is expected to weaken in the coming one or two years due to the risky experience of U.K’s disruptive exit from the E.U. against this backdrop, the USD could gain significant strength against the Sterling pound.